DIVERSIFICATION OF portfolio is the first rule of investment as it is insisted by any ethical professional. Usually, not more than 30 per cent of available investment funds should be assigned to any one category, including bonds, stocks and other savings instruments form one leg of a many-pronged platform. Direct commodity investment is a very risky venture, but it is safe only for the experienced investor who has time to monitor the market closely.
So what else is left there? For many investors, investment in real estate is an essential part of a well-rounded portfolio.
Real estate offers a wide range of opportunities, if you want to include ’paper’ in your investment scheme. Real Estate Investment Trusts (REITs), options, property oriented mutual funds and other mortgage backed securities are presently in disarray.
REITs are entities, which invest in real estate related properties or assets that include office buildings, hotels, shopping centres and mortgages secured by real estate. REITs come into one of three categories: Equity REITs, which invest in real estate properties and make money for investors from the rents they receive; Mortgage REITs, which lend money to developers and owners and invest in financial instruments that are secured by mortgages on real estate; Hybrid REITs, which are a combination of Equity and Mortgage REITs, are also secured by mortgages on real estate. To qualify for it, a company has to pay 90 per cent of its taxable income every year to shareholders and invest at least 75 per cent of its properties in real estate and generate 75 per cent or more of its gross income from investments in and mortgages on real estate property.
Options are an alternative form of offer. A potential buyer provides a sum, an option consideration, with the purpose of effectively taking a property off the market for a period of time. Option offers generally run anywhere between a few hundred and a few thousand dollars, but possibilities exist for higher or lower amounts. Some options bind one party only, some are called bilateral, both of which require adhering to contractually specified conditions. Conditions involve contingencies around financing, inspections and always have a time limit.
Every deal can be a little different and if the option isn’t exercised by the time limit specified, the potential buyer will forfeit the money. It is indeed a risky affair, but a potentially rewarding one because you have eliminated alternative bidders effectively. The optioner has one advantage: The time to find a buyer for the property itself, then selling the option. This helps one get rid of the need to pay for transactions costs and at the same time it keeps debt low, et cetera.
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